4 Comeback Kids for the Fourth Quarter

ANF, COH lead pack of potential performers to finish out the year

If you look at the major averages this year, you can see that despite a host of strong headwinds — e.g., a marked slowdown in China’s GDP growth, recession in Europe, anemic U.S. GDP and employment growth — stocks have been very, very good to the bulls. Just look:

Index

Third-Quarter returns

Year-to-date returns

Dow Jones

5%

10%

S&P 500

6.3%

14.6%

Nasdaq

6.5%

19.5%

Nasdaq-100

7.2%

22.6%

The driving force behind the Q3 gains — and by extension, the gains so far in 2012 — was the anticipation of central bank action here in U.S., and actually more importantly, in Europe. The Fed’s “QE Infinity” pledge to keep buying $40 billion worth of mortgage-backed securities for an unlimited period was even more than most bulls could hope for, and the anticipation for more easy money from the Fed helped stocks soar.

But from what I’ve gathered from conversations with floor traders and hedge fund managers, expectations that the European Central Bank would finally implement concrete plans to purchase bonds via “OMT,” or outright monetary transactions, was an even bigger catalyst sending stocks higher.

Of course, not all stocks have participated in the wider surge. In fact, so far in 2012 there has been a host of great companies that have failed to gain favor from the smart money. For both traders and investors, identifying the relative laggards with a chance of making a comeback could be the key to finding great tradable and/or investable opportunities.

If stocks do what they’ve done in the past, then we could very well see a post-election rally — and a Santa Claus rally that could lift many of the market’s beaten-down issues higher.

So, which stocks should investors look at as potential comeback kids during Q4?

Research In Motion (NASDAQ:RIMM): Research In Motion has been one of the least-loved fallen stars for many years, and so far in 2012 the shares are down nearly 48%. However, over the past month RIMM shares have mounted a monster comeback, spiking more than 25%. Solid earnings in its most-recent quarter, as well as optimism over its next-generation smartphones, could keep this stock’s upward momentum going until the end of the year.

Abercrombie & Fitch (NYSE:ANF): Fashion is a fickle handmaiden, and over the years we’ve seen how volatile teen retail stocks can be. This year, Abercrombie & Fitch has been the victim of changing tastes, as the shares are down more than 30% in 2012. Yet with every holiday shopping season there’s a chance at redemption, and with every battered issue comes a shot at a comeback. Recent bullish options action in ANF suggests that the stock might already have bottomed, and this perception could be the catalyst ANF shares need to make a run higher in Q4.

Netflix (NASDAQ:NFLX): Netflix shares have been called a “horror show,” and for good reason. The stock is down some 22% this year, and it faces a host of issues such as lagging profits, strong competition from the likes of Amazon (NASDAQ:AMZN) and Coinstar’s (NASDAQ:CSTR) Redbox DVD rental outlets. But even with some mighty strong headwinds, the stock has proven to be a comeback kid more than once in the past, and a wave of buying in Q4 could definitely take the beaten-down NFLX shares along for the ride.

Coach, Inc. (NYSE:COH): Perhaps my favorite out-of-favor stock in 2012 is everyman luxury goods retailer Coach. The stock is down about 8% this year, and while not nearly as battered as the other comeback candidates, COH shares have woefully lagged the major indices. One big reason why is the perception that Coach’s exposure to China is a declining proposition. Soft quarterly results were seen of late in terms of U.S. sales, but the company still has its sites on what still is — and what is likely to continue to be — a strong China and Asia market in the years to come. Moreover, disappointing quarterly results for Coach just means sales aren’t increasing as rapidly as they have in the past. If early results from this year’s holiday shopping season come in positive, look for money to come back into COH shares in a big way.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.